The Bid-Ask Spread
Chapters in this video
What this video covers
- Which price a customer receives when selling versus pays when buying, and why the customer always takes the worse side of the spread
- How to calculate the inside bid, inside ask, and NBBO spread by selecting the highest bid and lowest ask across multiple market maker quotes
- What a trade-through is, and why the order protection rule under Regulation NMS bars executions at prices worse than the protected NBBO
- The three specific exceptions to the trade-through prohibition: intermarket sweep orders, opening-reopening-closing transactions, and system failures or delays
- Why the spread compensates market makers for inventory risk and liquidity provision, not for market manipulation
- Which factors widen a spread (low liquidity, high volatility, small-cap and penny stocks) versus narrow it (high volume, competition, large-cap stocks)
- How to distinguish a normal risk-adjusted wide spread from an exam trap scenario designed to make you assume market manipulation
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